Daily News | BTC plummets by 10%, Wall Street Reveals Musk Reduced its Holdings in BTC, Fed's Scale of Balance Sheet Reduction Will Reach $1 Trillion

Crypto Daily Digest: Wall Street Reveals that Musk has reduced his holdings in Bitcoin, causing the market to plummet by 10% in response

Today, around 21:30 pm (UTC), Bitcoin suddenly plummeted by over 9%, reaching a low of $25,409 and $24,715, with a 24-hour drop of over 9.41%. Ethereum fell below $1,600 in the short term, reaching a minimum of $1,551.71. It is currently trading at $1,615.47, a 24-hour decline of 10.85%.

This decline has caused Bitcoin’s market value to fall below $500 billion for the first time since June 16 and hit its lowest point since June 20.

According to CoinGlass data, the sharp drop has resulted in clearing amounts exceeding $1 billion in the past 24 hours, an increase of 737.87% compared to the previous trading day. This includes $472 million in Bitcoin clearing and $302 million in Ethereum clearing, with most of the affected positions being long.

The crypto community attributed some of the declines to a report in the Wall Street Journal.

The report states that SpaceX’s balance sheet recorded a write down of $373 million in Bitcoin from 2021 to 2022, and the exact time of sale is not yet clear. Musk mentioned in a speech in 2021 that SpaceX owns Bitcoin, but as the company is a private company, the exact amount was not disclosed.

In addition, Tesla, another company under Musk, sold over 30000 Bitcoins for $936 million in the second quarter of 2022, accounting for approximately 75% of its initial $1.5 billion Bitcoin holdings.

Musk has always been a long-term enthusiast of cryptocurrencies, and in his introduction to X social media, there is a popular Dogecoin symbol called “Ð.” As is well known, any Musk-related news will impact the market.

Another news that may stimulate selling is that Chinese real estate developer Evergrande is filing for bankruptcy protection in the United States, raising concerns among investors that the problems in the Chinese real estate market may spread to other sectors of the global economy.

In recent weeks, Bitcoin prices have been declining, erasing about half of the increase after BlackRock applied for a Bitcoin ETF on June 15.

According to Bloomberg, one of the macro factors behind the sell-off is the continued soaring global interest rates, especially in the United States, where the 30-year treasury bond interest rate rose to 4.42%, the highest level since 2011. The yield of the 10-year treasury bond was 4.32, only one basis point lower than the 15-year high. This not only suppresses the price of cryptocurrencies but also hits risky assets in traditional markets.

Shiliang Tang, Chief Investment Officer of LedgerPrime, a cryptocurrency investment company, stated that earlier this week, people were optimistic that the resolution for the Grayscale Bitcoin ETF would be introduced this week. Still, it was ultimately passed without any results. In addition, traditional markets have been weak throughout the week, with the S&P 500 index and technology stocks selling off, 10-year interest rates hitting high levels, the US dollar rising, and weak Chinese credit and economic data, all of which are detrimental to risky assets

According to Kaiko data, the 90-day volatility of Bitcoin and Ethereum has decreased to 35% and 37% respectively, while the 90-day volatility of crude oil has reached 41%. Volatility is the rate at which the price of a specified asset rises or falls within a specified period of time.

From a historical perspective, Bitcoin has had high volatility, which has not been the case recently, but a sharp decline in transaction volume has accompanied this unusual stability. Data shows that Bitcoin trading volume reached its lowest level since November 2020 last month, with 30-day volatility approaching a five-year low.

It is worth noting that the volatility of Bitcoin is currently lower than that of the S&P 500 index, technology stocks, gold, etc.

Today’s Main Token Trends

BTC

Reviewing the live broadcast short position placed at $28,535 for BTC, with two target levels below $26,500 and $25,620. The recommended short position has realized gains/losses of 30.63%. There might be a continuation of a short-term downward move, stabilizing around $25,750 to initiate a minor rebound. Quick entry and exit are advised for seizing short-term rebounds.

ETH

Reviewing the live broadcast short position placed at $1,815 for ETH, with two target levels below $1,755 and $1,694. The short position has realized gains/losses of 18.40%. There might be a continuation of a short-term downward move, stabilizing around $1,631.28 to initiate a minor rebound. Quick entry and exit are advised for seizing short-term rebounds.

SEI

The high target of $0.2605 has been achieved for SEI, with continued downside potential towards $0.1668 and $0.1535. If the short-term doesn’t pull back to $0.1535, there might be further downward movement. Fibonacci sequence estimates for lower support levels include $0.1433, $0.1362, $0.1290, $0.1202, and the bottom target of $0.1060.

Macro: The Fed’s scale of balance sheet reduction will reach $1 trillion, which may trigger a huge market shock

The Federal Reserve is expected to shrink its massive balance sheet to $1 trillion this month, marking an important milestone in its attempt to reverse years of loose monetary policy. Investors have warned that further shrinking the balance sheet may impact financial markets.

In the early days of the COVID-19 pandemic, the Federal Reserve purchased trillions of dollars of government bonds and mortgage-backed securities to help stabilize the financial . However, since last spring, the Federal Reserve has stopped replacing its bonds when they expired.

As of August 9, since reaching a peak of $8.55 trillion in May last year, the Federal Reserve’s balance sheet has shrunk by $0.98 trillion. Analysis of weekly data shows that this size is expected to exceed $1 trillion by the end of this month.

The Federal Reserve’s reduction of its balance sheet, known as quantitative tightening (QT), has caused the government bond market to lose one of its biggest buyers, thereby increasing the debt supply that private investors must absorb.

For the Federal Reserve, QT may be an unstable path. The Federal Reserve was forced to end its attempt in 2019 after a sharp increase in borrowing costs caused by a scale reduction in the table and spooked the market.

So far, the latest round of tightening has progressed smoothly, although its speed is almost twice that of 2018-2019. Investors say this resilience reflects that the global financial has been flooded with cash since the pandemic. However, the background of further scaling is becoming more challenging.

Jay Barry, co-director of the American interest rate strategy of JPMorgan Chase, said that the second round of trillion-dollar scale reduction might have a greater impact. The first trillion dollar scale reduction was against the background of the rapid rise of federal funds interest rate, and the second trillion-dollar scale reduction was more important because it would appear against the background of accelerated supply of US treasury bond bonds.

The Federal Reserve’s goal is to reduce its balance sheet by another $1.5 trillion by mid-2025, while the US government is significantly increasing the size of new bond issuances and foreign investor demand is also weakening.

This may drive up borrowing costs for governments and businesses, and cause losses for many investors who have bought many bonds this year. These investors expect that as the interest rate hike cycle approaches its end, US bond yields will decline.

IMF senior economist Manmohan Singh stated that an additional $1 trillion in QT would be equivalent to an additional 15 to 25 basis points increase in the federal funds rate.

“As interest rates stabilize, the impact of more QT may be easier to see,” he said.

The US Treasury has increased its bond issuance this year to fill the gap between a decrease in tax revenue and an increase in government spending. Earlier this month, the department announced that it would expand the auction scale in the next quarter and further expand in the coming quarters. Megan Swiber, an interest rate analyst at Bank of America, estimated that the auction scale of some bonds might reach the peak in 2021 when the borrowing peak of COVID-19 pandemic occurred.

Meanwhile, demand from Japan, the largest foreign holder of US treasury bond bonds, is expected to decline. The Bank of Japan relaxed its control over the government bond market in July, pushing Japanese bond yields to their highest level in nearly a decade. The higher bond yields led some investors to predict that a large amount of Japanese funds would Flow back, including a large amount of funds flowing out of US treasury bond bonds.

However, foreign media have stated that even in this situation, it is expected that a reduction in the balance sheet will not lead to the liquidity disaster that occurred in 2019. Unlike four years ago, there is still a large amount of cash in the financial . Despite decreased usage, a special tool designed by the Federal Reserve to absorb excess cash still absorbs approximately $1.8 trillion per night. Bank reserve requirements have decreased this year, but they are still far above the level that the Federal Reserve has started to worry about.

However, some analysts believe that the yield of the US treasury bond bond market may rise significantly, especially for long-term treasury bonds.

“The Fed’s scale reduction, although passive, should lead to a steeper yield curve,” Barry said. “Although the interest rate hike has basically been completed, the scale reduction of the balance sheet may affect the yield curve for the rest of this year and next year.”

Since the yield of US treasury bond bonds supports the valuation of various asset classes, a sharp rise also means that the cost of corporate borrowers rises, and may undermine the rise of the stock market this year.

Scott Skyrm, a repo trader at Curvature Securities, said, “All of this has an impact on buyers, sellers, and the market. When one of them changes, there will often be more volatility. I expect more volatility to occur in September and October, as there will be more new bond issuances.”